The decline of Melbourne’s property market has been predicted for some time: after all, the stellar growth it experienced from 2008 into early 2010 – which saw average growth of around 33% – couldn’t last forever.

However, the subject of exactly when Melbourne would cool, and to what extent, has been one of some dispute. Many commentators said it would happen in late 2010; however, even into March of this year, auction clearance rates were still holding firm at more than 60%, and sales activity was 21% above the same period last year. Values also remain robust when markets elsewhere are falling – Residex measured growth during February at 0.8% for houses and 0.5% for units. Is this the last gasp of a dying market, or is there still more to come from Melbourne?

Andrew Wilson, economist at Australian Property Monitors, believes that Melbourne’s resilience is largely being fuelled by positive consumer sentiment.

“Consumer sentiment is still somewhat ahead of fundamentals, which are generally moving against Melbourne,” explains Wilson. “That’s coming through in the relatively high auction numbers. It’s surprising how much of a difference that ‘X factor’ can make.”

However, SQM Research managing director Louis Christopher argues that the rot has already set in.

“I have serious questions about the auction clearance rates that the Real Estate Institute of Victoria are reporting,” says Christopher. “From our analysis, the market has been weakening: finance approvals have come off, and there’s as much stock on market as there was back in 2000. I think we’re already starting to see the decline.”

He suggests that the decline – while not sharp – could continue for at least 12 months, and only an interest rate cut would be likely to arrest it.

Fundamental errors

What is it about Melbourne’s fundamentals that have the property gurus so concerned? It comes down to two things: supply and demand.

A key concern for Melburnians is that overseas students are choosing to study elsewhere due to the high dollar and competition from other international education institutions.

“The level of overseas migration is a worry,” says John Lindeman, chief consultant at Property Power Partners. “It will affect demand for rental, particularly in those middle-distance suburbs where students prefer to live. My advice would be to hold on for the time being and see if overseas migration picks up.”

While Lindeman agrees that a fall-off in rental demand could lead to negative growth as well, he says that this would take some time to occur.

“You need to closely watch those suburbs and how they perform: if rents start to fall in real terms, investors will start selling up and moving out. That could then lead to moderate price falls, although it could take four to five years to play out fully. Even so, we’re already seeing rental demand fall, so keep a close eye on performance.”

Another area of concern is the level of apartment building. There have been record numbers of approvals and commencements for unit developments: while this may have been fine at the levels of rental demand seen in 2008– 2009, now it’s raising the spectre of oversupply. Rob Farmer, CEO of RUN Property, thinks that this is being over-egged.

“Generally, Melbourne is still undersupplied for property,” he comments. “Yes, we may see specific parts of the market with an oversupply problem – there are a lot of developments going up along St Kilda Road and Docklands, for example. However, for those people who don’t necessarily want to live in central Melbourne, there’s really not a lot of development – and demand is still very strong in these parts.”

Farmer says that it’s the middle-ring suburbs where demand is being concentrated – and his offices report that demand is consistent across the board. “Sure, there may be two or three key areas that may have a glut, but the picture in the middle ring is very different.”

Lindeman’s take on the supply issue is very different, and he highlights outer suburbs like Melton, Cranbourne and Sunbury as potential danger zones.

“There have been huge developments taking place in those outer suburbs, but there’s little interest from the first homebuyer market – it’s too difficult to raise the deposit and get finance at the moment,” explains Lindeman. “That means there’s a danger of oversupply, and I’d be very wary of investing in those areas at present.”

Christopher agrees that the outer ring is a risky bet: while he thinks they could outperform in the short term, he adds that they are very sensitive to interest rate movements and an increase could mean trouble.

Are there any bright lights in the city? Lindeman suggests following the Gen Y crowd.

“The inner-suburban areas where Gen Y renters want to live are probably your best bet at present,” says Lindeman. “Places like Carlton, Richmond, South Yarra, North Melbourne and Melbourne itself. That’s a fairly safe bet for rental growth at least.”

Farmer adds that there’s also a lot of demand across the board for houses at or near the median house price in most suburban zones.

“It’s a very similar story to Sydney,” says Farmer. “There are underlying supply problems for everyday housing where people actually want to live. That’s holding prices up.”

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